The Canadian Small Business Financing Program (CSBFP) has been revamped by Industry Canada. The changes will go into effect April 1, 2014.
The CSBFP is a a program whereby Industry Canada provides a level of insurance against loan losses to banks and credit unions. The idea behind this is that these lenders will be more willing to lend money to startups and existing businesses if they can be protected against loan losses.
To qualify for this program, the business must have less than $5 million in revenue per year. Eligible loan purposes include:
- leasehold improvements
- real property (real estate)
The maximum about of financing continues to be $500,000 per borrower. Leaseholds and equipment can be financed to a maximum of $350,000 per borrower. The maximum loan guarantee is 10 years. If a loan is amortized over more than 10 years, it will be uninsured past the 10 year period if payments continue.
Interest rates remain the same. Lenders can charge a maximum of prime plus 3.0% or the residential mortgage rate plus 3.0%. The insurance premium remains the same at 2.0% of the loan amount.
Lenders were unable to charge loan fees. With the new changes, they will be able to charge loan fees, provided they do not charge fees in excess of what they would charge on their other business loans. These fees cannot be financed as part of the loan.
Lenders had been restricted to financing a maximum of 90% of the cost of eligible assets. Under the new program, they will be able to finance up to 100% of the cost of the eligible assets. It is important to note that while they will be able to finance assets at this level, they are under no obligation to do so. Lenders can finance assets at any percentage of cost that they are comfortable with.
These loans had required extensive documentation of purchases by way of receipts and proof of payment. This documentation is still required but the lender will only need to prove expenditures for the amount of the loan outstanding at the point of default when making a claim for loss. The effect of this will be that the lender needs to worry less about documenting every cent. Lenders may deem the receipts for small items financed under the program as being no longer necessary.
Appraisals will be required when assets or a service intended to improve the assets are performed by a person who is not at arms length from the borrower.
Personal guarantees used to be limited to 25% of the loan amount. This restriction has now been removed and the lender can require personal guarantees from the shareholders in an amount equal to 100% of the loan amount.
The Bottom Line
The net effect of these changes is to make the program more attractive to lenders. The number and amount of loans financed under this program has been falling in recent years. Industry Canada would like to get banks and credit unions lending to more businesses by making this program more attractive to them.
The program still remains a viable option for borrowers. It can be more costly than regular financing due to the premium but it might provide an option to get financing in situations where the lenders would not provide a loan without the added protection of the loan guarantee.
Full details of the program will be available on the Canadian Small Business Financing Program’s website on April 1, 2014.